Tuesday, November 22, 2005

Where's the Value?

It's going to take more than a cosmetic makeover to turn around Sears/Kmart. I would guess that people shop at WalMart because shoppers know they will find cheaply priced products. I'm not sure how much power Sears has over its suppliers, but as many already know, WalMart dominates many of its suppliers. WMT also has unique, yet sometimes controversial, employee policies. WalMart has also been on top of the supply-chain logistics with things like the hub and spoke distribution network. WMT's control over the costs is what I'd imagine allowed the company to offer cheaper products and establish its current position. I'm not sure how Sears/Kmart's model works, so perhaps it's problem is more than what I've suggested.

It's kinda tough being a value investor in a strong market. Traditional "value" methods of screening for companies will rarely pick out winners in current markets. And if you look at it relatively, SHLD looks more of value play than stocks like WMT. SHLD's enterprise value is almost $22 billion. It's current assets amount to about $14 billion, so if you liquidated all of its assets (including PP&E and excluding intangibles), you'd probably have about $25 billion. Now consider WMT, which has an enterprise value of almost $240 billion. Yet it only has about $40 billion in current assets. And if you fully liquidated all of its assets, you'd probably end up with half that of its market value.Value investing is great and all, but it's so hard finding candidates that meet all the criteria. I guess it really depends on how you define "value." Besides looking at their assets, you'd also have to consider their liabilities and obligations. And compared to many other stocks out there, SHLD looks like a pretty decent value play. SHLD just needs to make sure it can get rid of their inventory, enough to meet its current liabilities. But it’ll take more than that to compete profitably in the long term.

When Mr. Buffett is buying companies like WalMart and Anheuser Busch, you'd really have to wonder how he's measuring value or intrinsic value. I guess he really does weigh ROE greatly into his valuation matrix. But I would've never guessed that he'd go for WalMart at these levels... he's probably using some revenue ratio to value that play.



Theirs always value to be found.


Post a Comment

<< Home